nep-eec New Economics Papers
on European Economics
Issue of 2022‒06‒20
fourteen papers chosen by
Giuseppe Marotta
Università degli Studi di Modena e Reggio Emilia

  1. The rise of bond financing in Europe By Papoutsi, Melina; Darmouni, Olivier
  2. Monetary compensation schemes during the COVID-19 pandemic: Implications for household incomes, liquidity constraints and consumption across the EU By Silvia De Poli; Michael Christl; Francesco Figari; Tine Hufkens; Chrysa Leventi; Andrea Papini; Alberto Tumino
  3. Improving government quality in the regions of the EU and its system-wide benefits for cohesion policy By Barbero, Javier; Christensen, Martin; Conte, Andrea; Lecca, Patrizio; Rodríguez-Pose, Andrés; Salotti, Simone
  4. The revenue potential of inheritance taxation in light of ageing societies By KRENEK Alexander; SCHRATZENSTALLER Margit; GRUNBERGER Klaus; THIEMANN Andreas
  5. Greece 2010-18: What could we have done differently? By Cyrille Lenoël; Corrado Macchiarelli; Garry Young
  6. Unravelling deep integration: UK trade in the wake of Brexit By Rebecca Freeman; Kalina Manova; Thomas Prayer; Thomas Sampson
  7. A tale of two global monetary policies By Agrippino, Silvia Miranda; Nenova, Tsvetelina
  8. Climate Stress Test: bad (or good) news for the market? An Event Study Analysis on Euro Zone Banks By Costanza Torricelli; Fabio Ferrari
  9. Income Tax Policy in Europe between Two Crises: From the Great Recession to the COVID-19 Pandemic By Myck, Michal; Trzciński, Kajetan
  10. Exchanging money for love? A regional analysis of EU cohesion policy on euroscepticism By Bayerlein, Michael; Diermeier, Matthias
  11. The double materiality of climate physical and transition risks in the euro area By Gourdel, Régis; Monasterolo, Irene; Dunz, Nepomuk; Mazzocchetti, Andrea; Parisi, Laura
  12. Does income inequality change the relationship between environmental attitudes and subjective well-being? Evidence for 27 European countries By Ary Júnior
  13. Price and liquidity discovery in European sovereign bonds and futures By Jappelli, Ruggero; Lucke, Konrad; Pelizzon, Loriana
  14. Lost in Negative Territory? Search for Yield! By Mattia Girotti; Guillaume Horny; Jean-Guillaume Sahuc

  1. By: Papoutsi, Melina; Darmouni, Olivier
    Abstract: Using large panel data of public and private firms, this paper dissects the growth of bond financing in the Euro Area through the lens of the cross-section of issuers. In recent years, the composition of bond issuers has shifted, with the entry of many smaller and riskier issuers. New issuers invest and grow, instead of simply repaying bank loans. Moreover, holdings of ‘buy-and-hold’ bond investors are large in aggregate but small for weaker issuers. Nevertheless, the bond investors’ sell-off after March 2020 was largely directed at bonds of larger, safer issuers. This micro-evidence can shed light on the implications of corporate bonds market development for smaller firms and financial stability. JEL Classification: G21, G32, E44
    Keywords: bond investors, Corporate bond market, debt structure, disintermediation, ECB, financial fragility, monetary policy, quantitative easing
    Date: 2022–05
  2. By: Silvia De Poli (Joint Research Centre); Michael Christl (Joint Research Centre); Francesco Figari (University of Insubria); Tine Hufkens (Joint Research Centre); Chrysa Leventi (Athens University of Economics and Business); Andrea Papini (Joint Research Centre); Alberto Tumino (Joint Research Centre)
    Abstract: This paper analyses the effect of the COVID-19 pandemic on household disposable income and household demand in the European Union (EU) during 2020, making use of the EU microsimulation model EUROMOD and nowcasting techniques. We show evidence of heterogeneity in the impact of the COVID-19 pandemic on the labour markets in EU Member States, with some countries hit substantially harder than others. Most EU Member States experience a large drop in market incomes, with poorer households hit the hardest. Tax-benefit systems cushioned significantly the transmission of the shock to the disposable income and the household demand, with monetary compensation schemes playing a major role. Additionally, we show that monetary compensation schemes prevent a significant share of households from becoming liquidity constrained during the pandemic.
    Keywords: COVID-19, inequality, microsimulation, EUROMOD, compensation schemes, liquidity constraints, consumption, income stabilizers
    JEL: D13 E24 H24
    Date: 2022–06
  3. By: Barbero, Javier; Christensen, Martin; Conte, Andrea; Lecca, Patrizio; Rodríguez-Pose, Andrés; Salotti, Simone
    Abstract: We quantify the general equilibrium effects on economic growth of improving the quality of institutions at the regional level in the context of the implementation of the European Cohesion Policy for the European Union and the UK. The direct impact of changes in the quality of government is integrated in a general equilibrium model to analyse the system-wide economic effects resulting from additional endogenous mechanisms and feedback effects. The results reveal a significant direct effect as well as considerable system-wide benefits from improved government quality on economic growth. A small 5 per cent increase in government quality across European Union regions increases the impact of Cohesion investment by up to 7 per cent in the short run and 3 per cent in the long run. The exact magnitude of the gains depends on various local factors, including the initial endowments of public capital, the level of government quality, and the degree of persistence over time.
    Keywords: cohesion; economic growth; EU; government quality; public investment; regions
    JEL: J1
    Date: 2022–04–25
  4. By: KRENEK Alexander; SCHRATZENSTALLER Margit; GRUNBERGER Klaus (European Commission - JRC); THIEMANN Andreas (European Commission - JRC)
    Abstract: Based on the most recent data from the ECB’s Household Finance and Consumption Survey, the project models the future household-level wealth distribution in five selected EU member countries (Finland, France, Germany, Ireland, and Italy) to derive inheritances based on different demographic and wealth projection scenarios. On this basis, various inheritance tax scenarios are simulated to estimate potential inheritance tax revenues for a projection period of 30 years. Our results indicate that multiple factors coincide in favouring a growing revenue potential for inheritance taxation in the medium-term. Wealth accumulation and appreciation lead to higher average wealth levels. The shift of the baby boomer generation out of the labour force results in an increase of the older population both in absolute and relative terms. Eventually, this will lead to a rise in the number of deaths and the number of inheritances. Additionally, low fertility rates lead to a reduction of the average number of successors and thereby decrease the importance of exemption thresholds. Overall, our simulations show that the future revenue potential of inheritance taxes may be substantial. In practice, it can be expected that the theoretical revenue potential demonstrated by our simulations will be reduced by tax avoidance, real responses, and general equilibrium effects on other taxes. A review of the empirical evidence shows that behavioural responses to inheritance taxes are less pronounced compared to a net wealth tax.
    Keywords: inheritance taxation, wealth taxation, ageing, HFCS, behavioural effects
    Date: 2022–05
  5. By: Cyrille Lenoël; Corrado Macchiarelli; Garry Young
    Abstract: At the beginning of 2010, the fiscal situation of Greece was unsustainable, and an ambitious but costly adjustment plan had to be put in place under a consortium of the International Monetary Fund, the European Commission and the European Central Bank. It took three consecutive adjustment programmes, including debt-relief through private sector involvement, to restore confidence in the economy and achieve a budget surplus. In this paper, we provide a theoretical analysis of the Greek Crisis starting from 2010. We build a series of counterfactuals using the National Institute General Econometric Model (NIGEM) to analyse why the cost of the adjustment in terms of GDP loss and increase in debt-to-GDP ratio turned out to be much worse than expected. In doing so, we analyse three scenarios: (i) one in which we simulate a much more conservative cut in public investment by the Greek central government; (ii) a second scenario of a lower risk-premium, signalling, e.g., lower political and redenomination risks, had the European Central Bank guaranteed its lending of last resort role earlier than 2012; (iii) finally, a similar financial envelope as the one adopted during the first Greek adjustment programme but over a longer period, moving beyond the standard IMF three-year duration programmes. We find that the mix of expenditure cuts and loss of confidence among households and firms explain a large part of the unanticipated costs of the adjustment in the Greek crisis.
    Keywords: Fiscal multipliers; Fiscal policy; Government; Public Expenditure; Public Investment
    Date: 2022–06
  6. By: Rebecca Freeman; Kalina Manova; Thomas Prayer; Thomas Sampson
    Abstract: This paper studies the impact of Brexit on the UK's trade with the EU relative to its trade with the rest of the world. We find no evidence that uncertainty and anticipation effects led to a significant decline in relative UK trade with the EU during the period after the UK voted for Brexit in 2016 and before the change in policy was implemented under the new Trade and Cooperation Agreement (TCA) in 2021. However, the UK's departure from the EU's single market and customs union at the start of 2021 caused a major shock to UK-EU trade. We estimate that the new TCA trade relationship led to a sudden and persistent 25% fall in relative UK imports from the EU. In contrast, we find a smaller and only temporary decline in relative UK exports to the EU, but nevertheless a large and sustained drop in the extensive margin of exports, driven by the exit of low-value relationships. The timing and asymmetry of Brexit effects on UK imports and exports is puzzling and provides evidence of important differences in adjustment to integration and disintegration shocks.
    Keywords: Brexit, EU, exports, trade policy, globalisation, imports, uncertainty
    Date: 2022–12
  7. By: Agrippino, Silvia Miranda (Bank of England); Nenova, Tsvetelina (London Business School)
    Abstract: We compare the macroeconomic and financial spillovers of the unconventional monetary policies of the Fed and the ECB. Monetary policy tightenings in the two areas are followed by a contraction in global activity and trade, a retrenchment in global capital flows, a fall in global stock markets, and a rise in risk aversion. Bilateral spillovers are also powerful. Fed and ECB monetary policies propagate internationally through the same channels – trade and risk-taking – but the magnitude of ECB spillovers is smaller. We postulate that the relative importance of the euro and the US dollar in the international financial system can help to explain such asymmetries, and produce tentative evidence that links the strength of the ECB spillovers to € exposure in trade invoicing and the pricing of financial transactions.
    Keywords: Unconventional monetary policy; high-frequency identification; international spillovers; Fed; ECB
    JEL: E52 F42 G15
    Date: 2022–04–14
  8. By: Costanza Torricelli; Fabio Ferrari
    Abstract: The scope of this paper is to assess the effect 2021 ECB Climate stress test on the stock prices of the banks included in the exercise. To this end, we set up an event study analysis, whereby at the relevant dates we use market data in order to test for the existence of abnormal returns. Three main results emerge from our research. First, on 18.03.2021 investors’ fear arising from the details published about the methodology of the ECB climate stress test and some preliminary evidence had a negative impact on banks stock prices. Second, on the date of publication of the final results on 22.09.21, we find a positive reaction from market participants, since the market possibly expected the banks’ exposure to climate risks to be greater than the one emerging from final results. Third, on the starting date of COP26, an event related to the worldwide consensus on the need to manage climate change, we find a negative effects on banks’ quote that can be explained by the too tiny progresses reached by the summit, which are considered too mild and not adequate to reach the Paris Agreement goals. Finally, robustness tests including small banks not directly supervised by the ECB and banks with a business model not focused on credit intermediation, indicate that the market consider them less exposed to climate risks than larger banks. Our results may have implications in view of future climate stress tests.
    Keywords: banks climate stress test; physical risk; transition risk; abnormal returns; event study.
    JEL: G14 G28 F55
    Date: 2022–05
  9. By: Myck, Michal (Centre for Economic Analysis, CenEA); Trzciński, Kajetan (Centre for Economic Analysis, CenEA)
    Abstract: We examine the revenue and redistributive effects of tax policy reforms in twelve European countries over the decade between the financial crisis and the outbreak of the COVID-19 pandemic, setting them against the implications of a hypothetical system reflecting the extent of fiscal drag resulting from nominal wage increases. We show that the combination of wage growth and progressivity of the tax system determined the fiscal leeway which governments could use to reduce income inequality. Despite significantly faster wage growth in the examined post-communist countries of Central and Eastern Europe, their much lower degree of progressivity implied limited additional scope for fiscal changes. While decisions taken in most of the examined countries in the CEE region led to increases in tax progressivity, their income tax systems continue to be far less redistributive in comparison with such countries as Ireland, the Netherlands, or Portugal. This not only has direct implications for income inequality but also translates into limitations of automatic fiscal drag effects on government revenues, which could offer additional resources, in particular at a time of high inflation.
    Keywords: income tax, tax reforms, fiscal drag
    JEL: H24 D31
    Date: 2022–05
  10. By: Bayerlein, Michael; Diermeier, Matthias
    Abstract: In the past, the European Union seems to have been able to tame Euroscepticism through regional 'convergence' funding. After the Eastern enlargement of the Union, however, this relationship needs to be put to the test. Not only have the new member states become the main recipients of EU funding, Eastern Europe has also changed from once being the most integration-friendly region to displaying the most integration-hostile attitudes in the EU. Motivated by this empirical puzzle, we revisit the relationship between structural 'convergence' funding and Euroscepticism and ask where - if at all - is the EU's convergence spending still able to tame Euroscepticism. Most surprisingly, correlation analyses reveal that between 2006 and 2018 larger regional subsidies go along with increasing opposition to EU integration. We can rebut this counterintuitive finding by a Diff-in-Diff approach that reveals an increasing Euroscepticism in Eastern European regions between 2006 and 2014. Nevertheless, also these more advanced models fail to establish a positive relationship between regional funding eligibility and pro-integrationist attitudes. Finally, fuzzy RDD models exploit the funding assignment rule and corroborate that the EU is no longer able to pacify integration-critical regions by their simply increasing 'convergence' funding. Nevertheless, the EU has won support in Eastern Europe where EU investments are perceived (positively). In designing a strategy to win back support for EU integration, Brussels does not need more fiscal capacity but rather has to design 'convergence' funding that is visible as well as clearly attributable to its donor.
    Keywords: Euroscepticism,cohesion policy,EU transfers,methodology,regional analysis
    JEL: D72 F14 H11 I38
    Date: 2022
  11. By: Gourdel, Régis; Monasterolo, Irene; Dunz, Nepomuk; Mazzocchetti, Andrea; Parisi, Laura
    Abstract: The analysis of the conditions under which, and extent to which climate-adjusted financial risk assessment affects firms’ investment decisions in the low-carbon transition, and the realisation of the climate mitigation trajectories, still represent a knowledge gap. Filling this gap is crucial to assess the “double materiality” of climate-related financial risks. By tailoring the EIRIN Stock-Flow Consistent model, we provide a dynamic balance sheets assessment of climate physical and transition risks for the euro area, using the climate scenarios of the Network for Greening the Financial System (NGFS). We find that an orderly transition achieves important co-benefits already in the mid-term, with respect to carbon emissions abatement, financial stability, and economic output. In contrast, a disorderly transition can harm financial stability, thus limiting firms’ capacity to invest in low-carbon activities that could decrease their exposure to transition risk and help them recover from climate physical shocks. Importantly, investors’ climate sentiments, i.e. their anticipation of the impact of the carbon tax across NGFS scenarios, play a key role for smoothing the transition in the economy and finance. Our results highlight the importance for financial supervisors to consider the role of firms and investors’ expectations in the low-carbon transition, in order to design appropriate macro-prudential policies for tackling climate risks. JEL Classification: B59, Q50
    Keywords: climate physical risk, climate transition risk, double materiality, Network for Greening the Financial System scenarios, Stock-Flow Consistent model
    Date: 2022–05
  12. By: Ary Júnior
    Abstract: This paper explores the effects of income inequality on the relationship between environmental attitudes and life satisfaction across 27 European countries. Furthermore, it assesses the influence of the European Union on their citizens’ behavior regarding the link between environmental attitudes and happiness. Using data from European Values Study, it applies an ordered probit model. The findings suggest that subjective and objective income inequality do not change the relationship between environmental attitudes and welfare, providing evidence of the “commitment effect”. The results also show similar performance of the relationship between environmental attitudes and well-being between EU-members and non-EU members.
    Date: 2022–05
  13. By: Jappelli, Ruggero; Lucke, Konrad; Pelizzon, Loriana
    Abstract: This work uses financial markets connected by arbitrage relations to investigate the dynamics of price and liquidity discovery, which refer to the cross-instrument forecasting power for prices and liquidity, respectively. Specifically, we seek to understand the linkage between the cheapest to deliver bond and closest futures pairs by using high-frequency data on European governments obligations and derivatives. We split the 2019-2021 sample into three subperiods to appreciate changes in the liquidity discovery induced by the COVID-19 pandemic. Within a cointegration model, we find that price discovery occurs on the futures market, and document strong empirical support for liquidity spillovers both from the futures to the cash market as well as from the cash to the futures market.
    Keywords: Fixed Income,Limits to Arbitrage,Market Liquidity
    JEL: G12 G13 G15
    Date: 2022
  14. By: Mattia Girotti; Guillaume Horny; Jean-Guillaume Sahuc
    Abstract: We study how negative interest rate policy (NIRP) affects banks’ loan pricing. Using contract-level data from France, we show that NIRP affects bank lending rates to firms through a portfolio rebalancing channel: banks holding a one standard deviation more of cash and central bank reserves offer a 8.6 basis points lower loan rate after NIRP is introduced. The impact concentrates on medium-term loans (with maturity comprised between three and six years) but not on loans to risky firms, indicating that banks conduct a search for yield focused on term spreads. These findings suggest that NIRP complements quantitative easing policies.
    Keywords: Negative interest rates, portfolio rebalancing, search for yield, term spreads, banks
    JEL: E43 E58 G21
    Date: 2022

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